Built a 6% position in West Coast Self-Storage trading at roughly 13x funds from operation and an 8% cap rate

Believe we invested in an undervalued, under-levered and growing self storage company with an owner-operator at the helm

We paid $100 per share for a collection of assets that is worth roughly $150 and growing over time

Will also receive 4% cash distribution per year and we may re-invest in the company if prices remain low

During GFC, revenue and FFO decreased by less than 7% during that time period

FRPH Holdings

Owns a collection of income producing real estate assets, royalty streams, and valuable land parcels – land parcels provide an organic growth pathway in the next 5-10 years

Believe that we purchased the security at less than 60 cents on the dollar

Due to a low debt-to-capital ratio, believe downside risks due to interest rate movements or error in our analysis will be dampened

Believe that management is conservative and shareholder-friendly

Company has publicly stated that their objective is to convert excess land into income-producing assets via internal build outs

In instances where they sell land parcels, they will use 1031 exchanges to swap into income-producing assets in order to defer taxes

Subsequent to end of Q2, Company reported drops in occupancy rates in their warehouse portfolio and drops in royalty income of the aggregate business

Management has indicated that this is temporary and the warehouse occupancy is already back to 90%

We expect aggregate royalty revenue to increase in the coming quarters

Management indicated that the cash portion of the distribution will be roughly $24 million or $2.40 per share if they elect to convert to REIT

Macy’s

Owns and operates via long-term leases a large collection of anchor stores in Class A malls throughout the US

Macy’s trophy buildings and their Class A mall real estate is roughly equal to Macy’s entire enterprise value at our cost – we get Macy’s retail operation and credit card processing business for free

We do acknowledge that Macy’s retail business is challenging in the age of fast fashion and Amazon – but we believe that Terry Lundgren is one of the best department stores CEOs and Macy’s will continue to generate substantial FCF for the next 10 years

Macy’s has been allocating its FCF towards dividend payments and share buybacks

Presence of Starboard Value and Greenlight will ensure that Macy’s thoroughly considers its real estate options

We have discovered that average asking rent in the Herald Square area in New York City has declined from $890 to $734 per square foot y/y

Most retail corridors in NYC have seen declines in average asking rents in the mid-single digits to low teens

Given that our thesis is broken, objective now is to trade out of our position the best that we can

What Went Wrong with Macy’s

We underestimated the customer concentration risk of owning Macy’s as a proxy for owning all the associated real estate

Single tenant concentration risk made it too risky for us to add to our position as the business deteriorated and share prices declined

In hindsight, an astute private real estate investor will be very reluctant to invest in a portfolio that is entirely leased to Macy’s

In the future, we will avoid investing in operating companies as a proxy for owning the real estate except for extraordinary circumstances

These exceptions will include robust operating fundamentals concurrent with publicly announced plans to unlock real estate value

The other exception will involve companies that can be quickly liquidated for its real estate value and still return proceeds that far exceeds our purchase price

We underestimated the structural deterioration of the department store business

Macy’s has the wrong retail offering and was losing customers to both the brick and mortar competitors such as TJ Maxx and fast fashion and to online retailers like Amazon.com

This is compounded by Macy’s size as it is incredibly difficult to change Macy’s strategy due to their immense retail square footage

To avoid this mistake in the future, we have become more focused on investing in higher quality companies with shareholder friendly management teams rather than lower quality companies trading at cheaper multiples

While we think that Macy’s still owns some incredible assets, it will take a very long time to monetize them

TerraForm Power

Renewable energy yieldco that is similar in structure to REITs and MLPs in that it is meant for investors who seek growing distributions over time

SunEdison is the sponsor of TERP and its bankruptcy filing has forced TERP to suspend its dividend and delayed the filing of its financials as SunEdison and TERP both share the same financial reporting system

Believe that TERP sold off because the natural shareholder base of TERP demands consistent and growing distributions and the market was afraid that the SunEdison bankruptcy will drag TERP into a messy restructuring

Brookfield restructuring should occur by year end; wind and solar assets generated $515 million of EBITDA and $170 million of CAFD in 2016

Believe that we are 6 months away from Terraform Power fully catching up with its SEC filings